Oligopoly, Cournot's Oligopoly Model

Meaning of Oligopoly

Oligopoly is a market
condition, in which there are a few selling standardised of diverse commodities. It
is hard to point out the number of industries in the oligopolist market. There may
be more than two industries. It is also known to be rivalry amongst the few. With only
a few industries in the market, the performance of one industry is tending to affect
the others.

An oligopoly firm manufactures products either a standardised product or assorted commodities.
The former is called perfect oligopoly and the subsequent is called imperfect oligopoly.

Cournot’s Oligopoly Model

Cournot model of oligopoly is perchance the prime model which explains the mannerism
of a single industry under stipulations of monopoly and perfect competition.

An illustration would explain the oligopolistic situation in the market.

Illustration 2

Presume the market demand curve of a product is V = 140 – A. Assume that there
are more than two industries and we are considering two industries for comparison,
each with invariable marginal cost MC of $20.

Supposing they perform as Cournot oligopolists, determine the price and total
firm productivity.

Compare with the result under pure monopoly and perfect competition.

Solution

Market demand for output is V = MC

⇒ 140 – A = MC

⇒ 140 – A = 20

⇒ A = 140 – 20

⇒ A = 120

Let us assume the productivities of the two industries as A1 and A2 and that the total
productivity would be A1 + A2 = A.

⇒A1 = 120 – A2 ………….Equation
(1)

2

⇒ A2 = 120 – A1 ………….Equation
(2)

2
Substituting the value of A2 in Equation (1), we obtain the following

⇒ A1 = 120 – [ 120 – A1] 2
2

⇒A1 = 120 – 60 + ½ A1
2

⇒A1 = 60 – 30 + ¼ A1

⇒A1 – ¼ A1 = 30

⇒¾ A1 = 30

⇒A1 = 30 x 4/3

⇒A1 = 40

By substituting A1 as 40, we get A2 as 40 and thus we can derive the total productivity
as A = A1 + A2 = 40 + 40 = 80

To determine the price, using the task, V = 140 – A, we get

V
(Value or Price) = 140 – (40+40) = 140 – 80
=
60

Hence Price V = 60, Total Productivity A = (A1 + A2) = 80

Condition 2

To compare with the results under monopoly and perfect competition, we have to compute
as follows.

Marginal revenue under pure monopoly MR = Total Revenue / Total Quantity
And Total Revenue is Price x Quantity.

Let us assume A1 and A2 as 2A since this is pure monopoly and there cannot be two productivities.
Now, in equilibrium productivity under monopoly MR = MC.

MR = 140 – 2A and MC is given as 20

140 – 2A = 20; 2A = 120

A = 60

Price under pure monopoly, V = 140 – A = 140 – 60 = 80.

(ii) Output under perfect competition

For equilibrium productivity under perfect competition

Price = MC

140 – A = 20; A = 120

Price under perfect competition = 140 – 120 = 20.

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